FIN 534 Week 6 Quiz 5 Chapters 8 And 9

This is a multiple choice quiz for FIN/534. I have posted just the correct answers

Quiz 5 Chapters 8 and 9

Question 1

Call options on XYZ Corporation’s common stock trade in the market.  Which of the following statements is most correct, holding other things constant?

Question 2

Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the

Question 3

Which of the following statements is CORRECT?

Question 4

Which of the following statements is CORRECT?

Question 5

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Question 6

An option that gives the holder the right to sell a stock at a specified price at some future time is

Question 7

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17.  The annual risk-free rate is 6.0%, based on daily compounding.  A 1-year call option on the stock, with an exercise price of $22, is available.  Based on the binominal model, what is the option’s value?

Question 8

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.  What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Question 9

Which of the following statements is CORRECT?

Question 10

Deeble Construction Co.’s stock is trading at $30 a share.  Call options on the company’s stock are also available, some with a strike price of $25 and some with a strike price of $35.  Both options expire in three months.  Which of the following best describes the value of these options?

Question 11

Which of the following statements is CORRECT?

Question 12

Warner Motors’ stock is trading at $20 a share.  Call options that expire in three months with a strike price of $20 sell for $1.50.  Which of the following will occur if the stock price increases 10%, to $22 a share?

Question 13

Suppose you believe that Johnson Company’s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.  For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share.  If you buy this option for $310.25 and Johnson’s stock price actually rises to $45, what would your pre-tax net profit be?

Question 14

Which of the following statements is CORRECT?

Question 15

Suppose you believe that Delva Corporation’s stock price is going to decline from its current level of $82.50 sometime during the next 5 months.  For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share.  If you bought this option for $510.25 and Delva’s stock price actually dropped to $60, what would your pre-tax net profit be?

Question 16

Which of the following statements is CORRECT?

Question 17

Which of the following statements is CORRECT?  Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth

Question 18

When working with the CAPM, which of the following factors can be determined with the most precision?

Question 19

For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT?

Question 20

Which of the following statements is CORRECT?

Question 21

Safeco Company and Risco Inc are identical in size and capital structure.  However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 10% and Risco a WACC of 12%.  Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project.  Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project. Now assume that the two companies merge and form a new company, Safeco/Risco Inc.  Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y.  Which of the following statements is CORRECT?

Question 22

Which of the following statements is CORRECT?

Question 23

Which of the following statements is CORRECT?

Question 24

Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings.  This same situation is expected to persist in the future.  The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock,

Question 25

Which of the following statements is CORRECT?

Question 26

For a typical firm, which of the following sequences is CORRECT?  All rates are after taxes, and assume that the firm operates at its target capital structure.

Question 27

Which of the following statements is CORRECT?

Question 28

The MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects.  The firm’s overall WACC is 12%.  The CFO believes that this is the correct WACC for the company’s average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.  The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.  If the CEO’s position is accepted, what is likely to happen over time?

Question 29

Which of the following statements is CORRECT?

This is a multiple choice quiz for FIN/534. I have posted just the correct answers

Quiz 5 Chapters 8 and 9

Question 1

Call options on XYZ Corporation’s common stock trade in the market.  Which of the following statements is most correct, holding other things constant?

Question 2

Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the

Question 3

Which of the following statements is CORRECT?

Question 4

Which of the following statements is CORRECT?

Question 5

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Question 6

An option that gives the holder the right to sell a stock at a specified price at some future time is

Question 7

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17.  The annual risk-free rate is 6.0%, based on daily compounding.  A 1-year call option on the stock, with an exercise price of $22, is available.  Based on the binominal model, what is the option’s value?

Question 8

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.  What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Question 9

Which of the following statements is CORRECT?

Question 10

Deeble Construction Co.’s stock is trading at $30 a share.  Call options on the company’s stock are also available, some with a strike price of $25 and some with a strike price of $35.  Both options expire in three months.  Which of the following best describes the value of these options?

Question 11

Which of the following statements is CORRECT?

Question 12

Warner Motors’ stock is trading at $20 a share.  Call options that expire in three months with a strike price of $20 sell for $1.50.  Which of the following will occur if the stock price increases 10%, to $22 a share?

Question 13

Suppose you believe that Johnson Company’s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.  For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share.  If you buy this option for $310.25 and Johnson’s stock price actually rises to $45, what would your pre-tax net profit be?

Question 14

Which of the following statements is CORRECT?

Question 15

Suppose you believe that Delva Corporation’s stock price is going to decline from its current level of $82.50 sometime during the next 5 months.  For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share.  If you bought this option for $510.25 and Delva’s stock price actually dropped to $60, what would your pre-tax net profit be?

Question 16

Which of the following statements is CORRECT?

Question 17

Which of the following statements is CORRECT?  Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth

Question 18

When working with the CAPM, which of the following factors can be determined with the most precision?

Question 19

For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT?

Question 20

Which of the following statements is CORRECT?

Question 21

Safeco Company and Risco Inc are identical in size and capital structure.  However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 10% and Risco a WACC of 12%.  Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project.  Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project. Now assume that the two companies merge and form a new company, Safeco/Risco Inc.  Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y.  Which of the following statements is CORRECT?

Question 22

Which of the following statements is CORRECT?

Question 23

Which of the following statements is CORRECT?

Question 24

Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings.  This same situation is expected to persist in the future.  The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock,

Question 25

Which of the following statements is CORRECT?

Question 26

For a typical firm, which of the following sequences is CORRECT?  All rates are after taxes, and assume that the firm operates at its target capital structure.

Question 27

Which of the following statements is CORRECT?

Question 28

The MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects.  The firm’s overall WACC is 12%.  The CFO believes that this is the correct WACC for the company’s average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.  The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.  If the CEO’s position is accepted, what is likely to happen over time?

Question 29

Which of the following statements is CORRECT?

Question 30

 

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

 
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HCC MAN1021 Final Exam (

Question

Question 1

1. Which of the following statements about the importance of communication is true?

a. Many of the basic management processes cannot be performed without effective communication.

b. Oral communication is the most important skill for college graduates who are entering the work force.

c. Poor communication skill is the single most important reason that people do not advance in their careers.

d. Communication is especially important for top managers.

e. All of these statements about the importance of communication are true.

2 points

Question 2

Which of the following statements about what makes a successful leader is true?

a. Successful leaders have the same traits that nonleaders have.

b. Successful leaders have drive, which is defined as the ability to attract and retain the best employees.

c. Successful leaders are confident about their ability to make long-term strategic decisions even if the decisions seem risky to others.

d. Successful leaders believe in individual reciprocity.

e. None of these statements about what makes a successful leader is true.

2 points

Question 3

Conscientiousness is ____.

a. the degree to which someone is organized, hardworking, responsible, and achievement-oriented

b. the degree to which someone is curious

c. the degree to which someone is active and gregarious

d. the degree to which someone is cooperative, flexible, good-natured, tolerant, and trusting

e. defined by none of these

2 points

Question 4

Of all types of departmentalization, ____ departmentalization requires the highest level of management skill for successful implementation.

a. functional

b. product

c. matrix

d. geographic

e. customer

2 points

Question 5

As a class project, Senora is working with other classmates to create a company that would market NASCAR memorabilia. Senora’s teacher has instructed her to use the traditional approach to create the organization’s structure. What should Senora do?

a. create a virtual organization

b. create an organizational structure with vertical and horizontal configurations

c. use an organizational process to create a matrix design

d. create a matrix structure that will adhere to the unity of command principle

e. use the organizational structure to control creativity

2 points

Question 6

Marketers often appeal to consumers’ needs as defined by Maslow’s hierarchy. Schlage, a lock manufacturer, shows how much protection its locks provide. Clorox developed several types of wipes to eliminate concerns about infectious germs. Both marketers are appealing to which need as defined by Maslow?

a. achievement

b. physiological needs

c. safety

d. achievement

e. belongingness

2 points

Question 7

The term ____ refers to the degree to which someone is cooperative, polite, flexible, forgiving, good natured, tolerant, and trusting.

a. self-reliance

b. emotional stability

c. conscientiousness

d. agreeableness

e. locus of control

2 points

Question 8

____ is a technique of assuming half the responsibility for successful communication by actively giving the speaker nonjudgmental feedback that shows you’ve accurately heard what he or she said.

a. Active listening

b. Hearing

c. Synergistic communication

d. Dyadic communication

e. Empathetic listening

2 points

Question 9

Two of the most important results of a job analysis are ____.

a. recruiting guidelines and selection boundaries

b. employee-needs assessment and job mapping

c. job descriptions and job specifications

d. rater training and selection validation

e. employee-needs assessment and performance appraisal evaluation

2 points

Question 10

Hot Topic is a fast-growing clothing chain targeted to the alternative teen demographic. Hot Topic’s CEO is Betsy McLaughlin, who relies on her employees to locate new trends. McLaughlin almost daily consults with her employees for suggestions on what the stores should carry. After attending an Insane Clown Posse concert, an employee suggested that the stores should carry Faygo soda (the kind the band sprays on audience members during a concert). The employee’s suggestion was an example of ____ communication.

a. horizontal

b. functional

c. upward

d. downward

e. dyadic

2 points

Question 11

The ____ states that people will be motivated to the extent to which they believe that their efforts will lead to good performance, that good performance will be rewarded, and that they are offered attractive rewards.

a. equity theory

b. theory of motivational instrumentality

c. expectancy theory

d. goal-setting theory

e. reinforcement theory

2 points

Question 12

When Billy Ingram founded White Castle, much of the public thought that hamburgers were made from rotten beef and not fit for human consumption. Ingram ground fresh beef in front of customers to prove it was safe and was the first to successfully sell hamburgers to the middle class. Today Ingram is credited as the founder of the fast-food industry. Understanding that Midwesterners wanted clean, convenient food when they were away from home was the information Ingram used to ____.

a. create a tactical advantage

b. create a first-mover advantage

c. sustain a competitive advantage

d. acquire a source of perceived knowledge

e. pioneer sales in the consumer food industry

2 points

Question 13

Excessive speed is a major cause of road crashes in Australia. The Australian government is thinking of using cameras to catch speeders, but it only has access to a limited number of cameras, and there are many areas where speeding is a problem. Government officials plan to put cameras at various locations for four weeks and give everyone who gets caught speeding during that period a substantial fine. According to reinforcement theory, Australian officials are using ____ to control speeding.

a. positive reinforcement

b. negative reinforcement

c. punishment

d. expectancy modification

e. avoidance learning

2 points

Question 14

Pages listing all of the felony crimes perpetrated in New York during the last decade would be an example of ____.

a. a resource allocation table

b. traditional knowledge

c. raw data

d. perceived knowledge

e. information

2 points

Question 15

____ is the process by which individuals attend to, organize, interpret, and retain information from their environments.

a. Participative communication

b. Perception

c. Passive listening

e. Active hearing

e. Apprehension

2 points

Question 16

Mike is a big fan of all kinds of sports. As he walked past the snack room bulletin board, he was excited to notice that the company was sponsoring a softball team. Non-athletic Kenneth typically walks by the same bulletin board at least three times every day and has yet to see the softball notice. The fact that one saw the notice and the other did not is due to ____.

a. faulty closure

b. defensive biases

c. selective retention

d. selective perception

e. kinesics

2 points

Question 17

____ control is a method of gathering information about performance deficiencies as they occur.

a. Concurrent

b. Stasis

c. Feedback

d. Simultaneous

e. Feedforward

2 points

Question 18

____ control is top-down control in which managers try to influence employee behavior by rewarding or punishing employees for compliance or noncompliance with organizational policies, rules, and procedures.

a. Concertive

b. Administrative

c. Bureaucratic

d. Objective

e. Normative

2 points

Question 19

Noise can occur when ____.

a. the sender isn’t sure of what message to communicate

b. the receiver doesn’t have the time to understand the message

c. the message is not decoded properly

d. the message is not encoded properly

e.  any of these occur

2 points

Question 20

Which of the following is an example of an intrinsic reward?

a. a bonus

b. a contest prize

c. a sense of achievement

d. a trophy

e. all of these

2 points

Question 21

A group in Great Britain has been established to improve the employment, retention, and promotion prospects of black and other ethnic minorities as well as women in the Fire and Rescue Service, which at present has a largely white, male demographic. By the ____ stage of team development, the group members will have resolved petty differences, developed friendships, and established strong group cohesiveness.

a. forming

b. performing

c. storming

d. norming

e. reforming

2 points

Question 22

____ involves assigning direct authority and responsibility to a subordinate to complete tasks for which the manager is normally responsible.

a. Staff functionality

b. Delegation of authority

c. Decentralization

d. A job description

e. An organization chart

2 points

Question 23

In the traditional control systems used at most companies, ____ measures are used to assess performance.

a. quality/profit

b. customer

c. optimization

d. financial

e. value/quality

2 points

Question 24

Users of GM Master Cards earn money toward the purchase of a new General Motors car or truck every time they use this credit card to make purchases. The rebate increases the more times the credit card is used. GM is using ____.

a. punishment

b. positive reinforcement

c. negative reinforcement

d. underreward

e. extinction

2 points

Question 25

Which of the following statements about 360-degree feedback is true?

a. With the 360-degree feedback approach, feedback comes from four sources.

b. 360-degree feedback is most effective when used to train performance raters.

c. Employees do not provide feedback about their own efforts in the 360-degree feedback approach.

d A 360-degree feedback provides feedback from peer workers only.

e. 360-degree feedback should not be used for developmental purposes.

2 points

Question 26

E-Lab (the “E” stands for experience) has project teams perform field research for its clients. These project teams are composed of students of theology, actors, and musicians as well as the more traditional marketing experts and statisticians. E-Lab teams benefit from ____.

a. structural accommodation

b. group norms

c. team diversity

d. collectivism

e. aggregated creativity

2 points

Question 27

Which of the following is another term for considerate leadership behavior?

a. employee-centered leadership

b. concern for production

c. job-centered leadership

d. initiating structure behavior

e. participative management

2 points

Question 28

A car manufacturer ordered 20,000 window assemblies from a supplier. To make sure the assemblies were made to specifications, the supplier of the window assemblies shipped a sample to the car manufacturer for testing. This is an example of ____ control.

a. feedforward

b. feedback

c. contiguous

d. suboptimal

e. synergistic

2 points

Question 29

Managers can motivate employees to increase their efforts by ____.

a. relying on the innate value of extrinsic rewards

b. satisfying higher-order needs first

c. asking employees what their needs are then matching rewards to those needs

d. expecting employees’ needs to remain stable

e. doing all of these

2 points

Question 30

Job specialization can result in ____.

a. complicated job designs

b. high job satisfaction

c. employee boredom

d. low absenteeism

e. low employee turnover

2 points

Question 31

The ____ is a barrier that prevents women and minorities from advancing to the top jobs in an organizations.

a. missing key

b. diversity bottleneck

c. missing rung

d. organizational roadblock

e. glass ceiling

2 points

Question 32

Group cohesion tends to be relatively strong at the ____ stage of team development.

a. storming

b. conforming

c. norming

d. informing

e. forming

2 points

Question 33

____ is the relatively stable set of behaviors, attitudes, and emotions displayed over time that makes people different from each other.

a. Cognitive activity

b. Motivation

c. Self-concept

d. Disposition

e. Personality

2 points

Question 34

Relatively stable characteristics such as abilities, psychological motives, or consistent patterns of behavior, form the basis for the ____ of leadership.

a. path-goal theory

b. expectancy theory

c. situational theory

d. behavioral theory

e. trait theory

2 points

Question 35

The steps in the basic perception process include all of the following EXCEPT ____.

a. retention

b. organization

c. attention

d. analysis

e. interpretation

2 points

Question 36

According to a survey done on teaching evaluations, students’ motivation to participate in teaching evaluations is impacted significantly by their expectation that they will be able to provide meaningful feedback. In other words, if they are going to expend the thought and effort to fill out evaluation forms, (1) Is the form designed to gather meaningful information? and (2) Do the students have enough information to form a meaningful opinion about the instruction? In terms of expectancy theory, students are concerned with ____, or whether it is worth their efforts.

a. synergy

b. reciprocity

c. valence

d. instrumentality

e. expectancy

2 points

Question 37

Why is information strategically important for organizations?

a. Information can be used to obtain first-mover advantage.

b. Information is derived from perceived knowledge, which limits its availability.

c. Information cannot be used as a medium of exchange.

d. Information creates suboptimization opportunities.

e. All of these are examples of why information is strategically important for organizations.

2 points

Question 38

Airline companies have blamed their recent financial problems on labor unions, the events of September 11, and a weak economy. Those airlines in financial difficulties have tried to solve the problem through short-term price reductions, firings and early retirements, and asking for employees to take pay cuts. The CEOs of these companies have not tried to motivate employees to create long-term solutions to the problems facing the companies. The CEOs of these troubled companies ____.

a. are more interested in doing the right thing than doing things right

b. are more than likely managers rather than leaders

c. are true leaders

d. are promoting long-term change

e. tend to focus on organizational visions, missions, goals, and objectives rather than organizational efficiency and productivity

2 points

Question 39

Which of the following is an internal recruiting method?

a. advertising

b. job posting

c. walk-ins

d. job fairs

e. Internet job sites

2 points

Question 40

With divisions that focus on business clients and consumer clients, companies like Sprint, American Express, and others are examples of ____ departmentalization.

a. product

b. customer

c. matrix

d. boundaryless

e. functional

2 points

Question 41

The two basic methods of capturing information are ____.

a. manual and electronic

b. planned and unplanned

c. systematic and unsystematic

d. functional and hierarchical

e. continuous and intermittent

2 points

Question 42

The three components of ____ are initiation of effort, direction of effort, and persistence of effort.

a. motivation

b. performance

c. efficiency

d. self-management

e. compliance

2 points

Question 43

The fastest-growing population group in the United States is ____.

a. Hispanic-Americans

b. African-Americans

c. Canadians

d. Chinese-Americans

e. Vietnamese-Americans

2 points

Question 44

Which of the following statements about sexual harassment is true?

a. Only people who have themselves been harassed can file complaints or lawsuits.

b. Nonemployees cannot be guilty of sexual harassment.

c. Sexual harassment can occur between people of the same sex.

d. The three kinds of sexual harassment are quid pro quo, bona fide, and disparate treatment.

e. None of these statements about sexual harassment is true.

2 points

Question 45

According to ____, leaders need to make clear how followers can achieve organizational goals, take care of problems that prevent followers from achieving goals, and then find more and varied rewards to motivate followers who achieve those goals.

a. Fiedler’s contingency theory

b. the path-goal theory

c. the Boston Consulting Group leadership matrix

d. the Vroom-Yetton-Jago normative decision model

e. Blake and Mouton’s leadership grid

2 points

Question 46

Teams are typically required when ____.

a. tasks are simple

b. tasks require multiple perspectives

c. synergy will complicate the problem solution process

d. the company has very limited resources

e. any of these conditions are met

2 points

Question 47

Effective managers define ____ as the process of influencing others to achieve group or organizational goals.

a. autonomy

b. interpersonal influence

c. supervision

d. leadership

e. management

2 points

Question 48

Functional departmentalization ____.

a. makes it easier for top managers to assess work-unit performance

b. enhances coordination between departments

c. allows work to be done by highly qualified specialists

d. produces managers with broader experience and expertise

e. encourages interdepartmental communicatione

2 points

Question 49

____ is leadership that creates a positive image of the future that motivates organizational members and provides direction for future planning and goal setting.

a. Visionary leadership

b. Supportive leadership

c. Leadership empowerment

d. Transactional leadership

e. Achievement-oriented leadership

2 points

Question 50

____ generates awareness and acceptance of a group’s purpose and mission and gets employees to see beyond their own needs and self-interest for the good of the group.

a. Charismatic leadership

b. Transformational leadership

c. Leadership empowerment

d. Virtual leadership

e. Transactional leadership

 

 

 
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I Do, You Do, We Do

There are various instructional strategies to use when teaching a new literacy concept to students. The I Do, We Do, You Do (IWY) method is a common best practice that can be adapted during instruction. This practice includes direct instruction (I Do), guided practice (We Do), and independent practice (You Do).

Research various instructional strategies specific to concepts of print and phonemic awareness to teach new literacy concepts. Include the IWY method in your research. Describe how this strategy is implemented in grade levels K-8 and how it is effective as an instructional strategy in the classroom.

In 500-750 words, create a literacy instructional plan for how you will apply the IWY method in your future classroom when introducing new literacy concepts.

In your plan, be sure to address the following in your reflection:

  1. How the IWY model supports the introduction of new literacy concepts.
  2. How the IWY model creates and supports student engagement of typical and atypical students.
  3. How the IWY model supports differentiation to meet the diverse needs of students.
  4. Include any gaps that may be present in the IWY model.
  5. How you will use the IWY model in your future professional practice.

Support your findings with a minimum of three scholarly resources.

 
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Cash Flows and Dividend Valuation

Assignment 1: Cash Flows and Dividend Valuation  In this Assignment you will be reviewing the case study of Starbucks Corporation and completing questions and exercises relating to financial reports, financial statement analysis and financial valuation. This will show you how investors and analysts understand the present profitability and risk of firms and forecast future investment decisions.  Questions and Exercises: Income and Cash Flows  Answer the following questions from your textbook: (view grading rubric):

1.Chapter 3: Questions and Exercises: 3.2 (p.196): Articulation of the Statement of Cash Flows with Other Financial Statements. Describe how the statement of cash flows is linked to each of the other financial statements (income statement and balance sheet). Also review how the other financial statements are linked with each other.

2.Chapter 3: Integrative Case 3.1 Starbucks, Cash Flows: f (p. 219): Refer to the income statement for Starbucks in Exhibit 1.27). Compute the amount of EBITDA for 2010, 2011, and 2012.

3.Chapter

Starbucks 69

LO 1-2, LO 1-3,

LO 1-4, LO 1-5

INTEGRATIVE CASE 1.1

Starbucks

The first case at the end of this chapter and numerous subsequent chapters is a series of inte- grative cases involving Starbucks. The series of cases applies the concepts and analytical tools discussed in each chapter to Starbucks’ financial statements and notes. The preparation of responses to the questions in these cases results in an integrated illustration of the six sequen- tial steps in financial statement analysis discussed in this chapter and throughout the book.

Introduction

‘‘They don’t just sell coffee; they sell the Starbucks Experience,’’ remarked Deb Mills while sitting down to enjoy a cup of Starbucks cappuccino with her friend Kim Shannon. Kim, an investment fund manager for a large insurance firm, reflected on that observation and what it might mean for Starbucks as a potential investment opportunity. Glancing around the store, Kim saw a number of people sitting alone or in groups, lingering over their drinks while chatting, reading, or check- ing e-mail and surfing the Internet through the store’s wi-fi network. Kim noted that in addition to the wide selection of hot coffees, French and Italian style espressos, teas, and cold coffee- blended drinks, Starbucks also offered food items and baked goods, packages of roasted coffee beans, coffee-related accessories and equipment, and even its own line of CDs. Intrigued, Kim made a mental note to do a full financial statement and valuation analysis of Starbucks to evalu- ate whether its business model and common equity shares were as good as their coffee.

Growth Strategy

Kim’s research quickly confirmed her friend’s observation that Starbucks is about the experience of enjoying a good cup of coffee. The Starbucks 2012 Form 10-K (page 3) asserts the following:

Our retail objective is to be the leading retailer and brand of coffee in each of our tar- get markets by selling the finest quality coffee and related products, and by providing each customer a unique Starbucks Experience. The Starbucks Experience is built upon superior customer service as well as clean and well-maintained company operated stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty.

The Starbucks experience strives to create a ‘‘third place’’—somewhere besides home and work where a customer can feel comfortable and welcome—through friendly and skilled cus- tomer service in clean and personable retail store environments. This approach enabled Starbucks to grow rapidly from just a single store near Pike’s Place Market in Seattle to a global company with 18,066 locations worldwide at the end of fiscal 2012. Of that total, Starbucks owned and operated 9,405 stores (7,857 stores in the Americas; 882 stores in the Europe, Mid- dle East & Africa (EMEA) region; and 666 stores in the China and Asia Pacific (CAP) region). In addition, licensees owned and operated a total of 8,661 stores (5,046 stores in the Americas; 987 stores in the EMEA region; and 2,628 stores in the CAP region).

Most of Starbucks’ stores at the end of fiscal 2012 were located in the United States, amounting to one Starbucks retail location for every 28,000 U.S. residents. However, Starbucks was clearly not a company content to focus simply on the U.S. market, as it was extending the reach of its stores globally, with thousands of stores outside the United States. At the end of fiscal 2012, Starbucks owned and operated stores in a number of countries around the world, including 878 stores in Canada, 593 stores in the United Kingdom, and 408 stores in China.

Starbucks’ success can be attributed in part to its successful development and expansion of a European idea—enjoying a fine coffee-based beverage and sharing that experience with others in a comfortable, friendly environment with pleasant, competent service. Starbucks imported the idea of the French and Italian cafe ́ into the busy North American lifestyle. Ironi- cally, Starbucks successfully extended its brand and style of a cafe ́ into the European continent. On January 16, 2004, Starbucks opened its first coffeehouse in France—in the heart of Paris at 26 Avenue de l’Opera—and had a total of 67 stores in France by the end of 2012. The success of Starbucks’ retail coffeehouse concept is illustrated by the fact that by the end of 2012, Star- bucks had opened over 1,100 company-operated and licensed locations in Europe, with the ma- jority of them in the United Kingdom. Not long ago, Starbucks’ CEO Howard Schultz stated that his vision and ultimate goal for Starbucks was to have 20,000 Starbucks retail locations in the United States, to have another 20,000 retail locations in international markets worldwide, and to have Starbucks recognized among the world’s leading brands. Kim Shannon wondered whether Starbucks could ultimately achieve that level of global penetration because she could name only a few such worldwide companies. Among those that came to mind were McDonald’s, with more than 34,000 retail locations in 118 countries; Subway, with more than 34,000 locations in 90 countries; and Yum! Brands, with more than 40,000 restaurants in 130 countries under brand names such as KFC, Pizza Hut, and Taco Bel Growth in the number of retail stores had been one of the primary drivers of Starbucks’ growth in revenues. The most significant area of expansion of the Starbucks model in recent years has been the rapid growth in the number of licensed retail stores. At the end of fiscal 1999, Starbucks had only 363 licensed stores, but by the end of fiscal 2012, the number of li- censed stores had mushroomed to 8,661.

 

 

Recent Performance

 

in recent years caused Kim to question whether Starbucks had already reached (or perhaps exceeded) its full potential. She wondered whether it could generate the impressive growth in new stores and revenues that it had created in the past. In fiscal year 2008, Starbucks opened 1,669 net new retail locations (698 net new company- owned stores and 971 new licensed stores), but this number was well below the initial target of 2,500 new stores and well below the 2,571 new stores opened in 2007. Late in 2008, Starbucks announced a plan to close approximately 600 underperforming stores in the United States as well as 64 underperforming stores in Australia. The store closings triggered restructuring charges that reduced Starbucks’ operating income by $266.9 million in 2008. During fiscal 2009, they increased the restructuring plan to close a total of approximately 800 U.S. stores (an increase of 200), and managed to close 566 U.S. stores during the year. They also announced a plan to close 100 stores in various international markets. The 2009 store clos- ings triggered additional restructuring charges that reduced Starbucks’ operating income by $332.4 million in 2009. In 2009, for the first time in company history, Starbucks’ net store growth was negative, with a net of 474 stores closed in the United States (92 stores opened net of 566 closed) and only 89 net new international stores opened (130 stores opened net of 41 closed), for a net total closure of 385 company operated stores. In fiscal 2009, total revenues fell to $9.775 billion from $10.383 billion in fiscal 2008. Fiscal 2009 marked the first year of revenue decline (5.9%) in company history. Prior to 2009, Star- bucks had generated impressive revenue growth rates of 10.3% in fiscal 2008; 20.9% growth in fiscal 2007; and 22.2% in fiscal 2006. Starbucks’ revenue growth is not just driven by opening new stores; it is also driven by sales growth among existing stores. Through 2007, Starbucks could boast of a streak of

16 consecutive years in which it achieved comparable store sales growth rates equal to or greater than 5%, but that string was broken with negative 3% comparable store sales growth in 2008. Unfortunately, things got worse in 2009, because Starbucks’ company- operated stores generated a negative 6% growth in comparable U.S. store sales, a negative 2% growth in comparable international store sales, and a negative 6% growth in com- parable store sales overall. In response to the downturn in Starbucks’ business, in January, 2009, Howard Schultz returned from retirement and reassumed his role as president and CEO of Starbucks in order to restructure the business and its potential for growth. Focal points of his transformation plan included taking a more disciplined approach to new store openings, reinvigorating the Star- bucks Experience, developing and implementing even better service and quality, while cutting operating and overhead costs. In addition, the transformation plans included introducing more new beverage and food offerings, such as baked goods, breakfast items and chilled and other foods. A key to Starbucks profit growth lies in increasing same store sales growth via new prod- ucts. Starbucks regularly introduces new specialty coffee-based drinks and coffee flavors, as well as iced coffee-based drinks, such as the very successful line of Frappuccino drinks and Shaken Iced Refreshment drinks. Under Schultz’s renewed leadership, comparable store sales growth rebounded impres- sively, to 7% growth among U.S. stores and 6% among international stores. Starbucks’ store openings were very conservative in 2010, owing in part to the difficult economic conditions in the primary markets. In the United States, Starbucks only opened a net 3 new stores in 2010—opening 60 licensed stores while closing 57 company-owned stores. Internationally, Star- bucks opened 220 new stores in 2010—opening 235 licensed stores while closing 15 company- owned stores. Overall revenue growth also rebounded, reaching $10.7 billion (up 9.5% from 2009). Starbucks continued this modest new store growth trajectory into 2011. Among company- owned stores, Starbucks opened 49 but closed 51 in the United States and opened 180 but closed 36 international stores. Starbucks’ licensees opened 345 new stores internationally and 133 new stores in the United States. Unfortunately, because Borders’ Bookstores went bank- rupt in 2011, it closed the 475 Starbucks’ stores that it had licensed. This caused a net negative growth of 342 licensee closings in 2011 in the United States. Overall revenue again sustained healthy growth, with total revenues reaching $11.7 billion (up 9.3% from 2010). Kim was even more encouraged with Starbucks’ growth in fiscal 2012. During that period, Starbucks opened a total of 1,063 new stores. Of those, Starbucks opened 234 company-owned and 270 licensed stores in the Americas. In the EMEA region, Starbucks opened 10 company- owned and 101 licensed stores, as well as 154 company-owned and 294 licensed stores in the CAP region. Overall revenue reached $13.3 billion (up 14% from 2011).

Starbucks also continues to expand the scope of its business model through new channel development in order to ‘‘reach customers where they work, travel, shop, and dine.’’ To further expand the business model, Starbucks terminated its licensing and distribution agreement with Kraft Foods and now manages its own marketing and distribution of Starbucks whole bean and ground coffee to grocery stores and warehouse club stores. By the end of fiscal 2012, Star- bucks whole bean and ground coffees were available throughout the United States in approxi- mately 39,000 grocery and warehouse club stores. Further, Starbucks sells whole bean and ground coffee through institutional foodservice companies that service business, education, office, hotel, restaurant, airline, and other foodservice accounts. For example, in 2012 Starbucks (and their subsidiary, Seattle’s Best Coffee) were the only superpremium national brand coffees promoted by Sysco Corporation to such foodservice accounts. Finally, Starbucks had formed partnerships to produce and distribute bottled Frappuccino and DoubleShot drinks with PepsiCo and premium ice creams with Unilever.

 

Despite Starbucks’ past difficulties with store closings, restructuring charges, and negative comparable store sales growth rates, Kim could see some very positive aspects of Starbucks’ finan- cial performance and condition. She noted that Starbucks had been profitable in 2008 and 2009, despite the difficulties. She also noted that Starbucks generated record high profits in 2010, 2011, and 2012, suggesting the restructuring and turnaround efforts were proving successful. The restructuring plan was seemingly complete and had helped Starbucks to reduce costs. Further, she noted that Starbucks’ operating cash flows had remained fairly strong throughout this period. With its positive operating cash flows, Starbucks had retired all of the $713 million in commercial paper and short-term borrowings during 2009, initiated the first dividend in company history in 2010, resumed repurchasing common shares in 2010, and had grown the combined balances in cash and short-term investments over $2.0 billion by fiscal year-end 2012.

: Integrative Case 11.1 Starbucks, Dividend Valuation; a, b (p. 903): a. Use the CAPM to compute the required rate of return on equity capital for Starbucks. b. Compute the weighted-average cost of capital for Starbucks as of the start of Year +1. At the start of Year +1, Starbucks had $550 million in outstanding interest-bearing debt on the balance sheet and no preferred stock. Assume that the balance sheet value of Starbucks’ debt is approximately equal to the market value of the debt. Assume that at the start of Year +1, Starbucks will incur interest expense of 6.25% on debt capital and that Starbucks’ average tax rate is 33.0%.

see attached Rructions

 
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